Growth prospects for IMF Bentham
26/04/16 closing share price: 1.355
52 week high: 1.990
52 week low: 0.920
Most recent dividend: 5c Annual dividend yield: 7.35
It's rare to find a company with attractive growth prospects not being valued by the market. IMF Bentham (ASX: IMF) has laid the foundation for long-term growth but the market seems focused on its short-term underperformance.
IMF Bentham is a funder of commercial litigation in Australia. To the end of the 2014 calendar year, it had commenced 169 cases, of which 113 were settled, 15 won, six lost and 35 withdrawn. This model has generated $1 billion for clients and around $600 million for the firm.
Management recognised that the Australian funding market was reaching capacity and that a sustained focus on high-profile class actions would exacerbate the company's already high earnings volatility. So it began the 2015 calendar year with a bold vision.
IMF wanted to significantly grow its claims portfolio above $2 billion. It would do this by expanding aggressively overseas. It would also reduce the size of the claims that it funded, to reduce case duration and increase the rate of settlement.
This announcement came as the company was on track to make a record annual profit. It reported $23 million of profit for the first half of the 2014-15 financial year, which was well above the $10 million generated in the whole of 2013-14. Market capitalisation subsequently peaked at $411 million in February 2015.
IMF then experienced an abnormal run of case losses. Four were lost in quick succession. IMF Bentham settled relatively few cases in 2015, yet the cost base increased meaningfully as the company expanded overseas.
It reported a 2014-15 full-year profit of $6 million and a small loss in the first half of 2015-16. The market capitalisation has since fallen to $230 million.
These short-term results are certainly disappointing but the long-term potential of the company should be measured against the execution of its strategy. And management has made meaningful progress in this regard.
IMF Bentham appears very well positioned for future earnings growth. Provided that management has maintained its rigorous risk assessment while expanding the claims portfolio, we feel that the investment risks are weighted more to the upside than the downside.